The release of January 2014 Producer Price Index (PPI) data marks the transition from the Stage of Processing (SOP) aggregation system to the Final Demand–Intermediate Demand (FD–ID) aggregation system. The transition to the FD–ID system is the culmination of a longstanding PPI objective to improve upon the SOP aggregation system by incorporating price data for services, construction, government purchases, and exports. In comparison to the SOP system, the FD-ID system more than doubles PPI coverage of the U.S. economy to over 75 percent of in-scope domestic production.

The FD–ID system highlights the index for final demand. Examples of final-demand goods include pharmaceutical preparations destined for personal consumption, construction machinery and equipment for private capital investment, diesel fuel and jet fuel for government, and organic chemicals for export. Examples of final-demand services include consumer loan services, apparel retailing margins, passenger air transportation, wired and wireless telecommunication services for government, wholesale margins from machinery and equipment sold for capital investment, and wholesale margins from organic chemicals sold for export. Examples of final-demand construction include new school construction and new hospital construction.1

The FD–ID system also includes two separate parallel treatments of intermediate demand: price changes for goods, services, and construction sold to business as inputs to production. One treatment, intermediate demand by type of commodity, measures price changes on the basis of similarity of product and includes aggregate indexes for processed goods for intermediate demand, unprocessed goods for intermediate demand, and services for intermediate demand. The other treatment, intermediate demand by production flow, is a stage-based system of price indexes in which price changes for goods, services, and construction can be studied as they move through the production chain of the economy to final demand. This treatment includes four stages of intermediate demand, which were established to maximize the forward flow of production through the economy while minimizing backflow of production.2

This issue of Beyond the Numbers presents 2013 PPI data based on the new FD–ID system. The PPI estimates shown with this system represent the beginning of wider coverage by the index, to be continued in subsequent issues.

Services less trade, transportation, and warehousing for intermediate demand

1.6

1.6

Construction for intermediate demand

1.0

1.9

Intermediate demand, by production flow

Stage-4 intermediate demand

1.9

0.8

Total goods inputs to stage-4 intermediate demand

1.2

0.3

Total services inputs to stage-4 intermediate demand

2.5

1.4

Stage-3 intermediate demand

1.5

0.4

Total goods inputs to stage-3 intermediate demand

1.0

0.2

Total services inputs to stage-3 intermediate demand

2.1

1.0

Stage-2 intermediate demand

0.5

–0.3

Total goods inputs to stage-2 intermediate demand

–2.0

–0.4

Total services inputs to stage-2 intermediate demand

3.8

–0.1

Stage-1 intermediate demand

1.0

0.2

Total goods inputs to stage-1 intermediate demand

–1.3

–1.0

Total services inputs to stage-1 intermediate demand

4.1

2.1

Price trends: producer inflation remains low in 2013

The PPI for final demand advanced 1.1 percent in 2013 after rising 1.9 percent in 2012. Almost three-quarters of the slower rate of increase can be traced to prices for final-demand services, which moved up 1.3 percent following a 2.2-percent gain the previous year. The index for final-demand goods also rose less than it did in 2012, 0.7 percent compared with 1.4 percent. (See chart 1.) In contrast, prices for final-demand construction climbed 3.0 percent in 2013 after moving up 1.4 percent the previous year. Within intermediate demand, the index for processed goods was unchanged following a small increase in 2012, prices for unprocessed goods turned downward in 2013, and the index for services moved up at a slower rate than it did the previous year. (See table 1.)

Chart 1

12-month percent change in PPI for total final demand, goods, and services

Category

2012

2013

Final demand

1.9

1.1

Goods

1.4

0.7

Services

2.2

1.3

Economic background

Leading the deceleration in producer inflation in 2013, prices for final-demand services and for services for intermediate demand rose less than they did in 2012. Within services, the indexes for both final-demand trade services and intermediate-demand trade services turned downward in 2013. (Trade indexes in the PPI measure average changes in margins received by wholesalers and retailers.3) The downturn in trade margins was heavily influenced by activity in the retail sales sector. Retail sales increased 4.2 percent in 2013, compared with larger advances of 5.4 percent in 2012 and 7.5 percent in 2011.4 Retail sales excluding the motor vehicle sector moved up at a modest 3.2-percent rate in 2013, following a 4.9-percent increase in 2012. In contrast, sales in motor vehicles and related parts climbed 8.7 percent in 2013, surpassing the 7.7-percent rise in 2012.5 The PPIs for both final-demand and intermediate-demand transportation and warehousing services rose less in 2013 than they did the previous year. Prices for transportation and warehousing services often change in response to contract adjustment formulas structured in accordance with a base price–fuel adjustment factor mechanism.6 In 2013, the index for gasoline fell 1.0 percent and prices for diesel fuel declined 0.9 percent.

Final-demand goods. The increase in the index for final-demand goods slowed to 0.7 percent in 2013, after a 1.4-percent increase in 2012. In 2013, prices for final-demand goods less foods and energy advanced 1.1 percent, compared with a 1.4-percent increase the previous year. The index for final-demand foods fell1.1 percent after jumping 4.1 percent in 2012. In contrast, prices for final-demand energy rose 1.0 percent subsequent to a 1.3-percent decline the previous year.

Intermediate demand

Intermediate demand includes goods, services, and maintenance and repair construction sold to businesses, excluding capital investment. BLS publishes two parallel treatments of intermediate demand, each constructed from the identical set of commodity price indexes. One treatment organizes commodities according to their type, and the other organizes commodities in accordance with a stage-based, production flow model.

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1 The FD–ID system was first introduced as a set of experimental indexes in January 2011. Nearly all new FD–ID goods, services, and construction indexes provide historical data back to either November 2009 or April 2010, and the indexes for goods that correspond with the historical SOP indexes go back to the 1970s or earlier. For more information about the FD–ID system, see “A new, experimental system of indexes from the PPI program,” Monthly Labor Review, February 2011, pp. 3–24, http://www.bls.gov/opub/mlr/2011/02/art1full.pdf; or Producer price indexes: PPI Final Demand–Intermediate Demand (FD–ID) aggregation system (U.S. Bureau of Labor Statistics, February 3, 2014), http://www.bls.gov/ppi/fdidaggregation.htm. For more detail about overall PPI methodology, see “Chapter 14. Producer Prices,” BLS Handbook of Methods (U.S. Bureau of Labor Statistics), http://www.bls.gov/opub/hom/pdf/homch14.pdf.

2 The intermediate demand indexes titled “Processed Goods for Intermediate Demand” and “Unprocessed Goods for Intermediate Demand” are equivalent to the SOP indexes titled “Intermediate Materials, Supplies, and Components” and “Crude Materials for Further Processing.”

4Monthly and annual retail trade (U.S. Census Bureau, January 14, 2014), http://www.census.gov/retail. Data for December 2013 are provided under the section titled “Advance monthly retail trade report.” For historical data, an Excel file is provided under the heading “Monthly retail trade report.” Data for 2013 described in the analysis presented in this Beyond the Numbers article were taken from the advance report, downloaded January 16, 2014; the remainder of the data presented was extracted from the historical Excel file.

5 In 2010 and 2011, retail sales of motor vehicles and related parts increased 10.7 percent and 9.9 percent, respectively. From the sector’s low point in 2009, during the 2007–2009 recession, to the close of 2013, retail sales of motor vehicles and related parts jumped 42.4 percent.